How China can hurt America in Trump's trade war

The United States imports roughly $500 billion in goods and services from China each year. So if President Trump imposes tariffs on $150 billion worth of those imports—as he has threatened to do—there’d still be room to up the ante.

China only imports about $130 billion worth of US goods and services each year. So if China wanted to match all of Trump’s tariffs—as it has vowed to do—it would run out of imports to tax.

That would seem to give the United States an advantage in a trade showdown with China, which may be why Trump is bucking most mainstream advice and courting this trade war. But China can harm American interests in a variety of ways Trump may not be taking into account. “There are lots of different ways China can retaliate,” says Scott Kennedy, director of the project on Chinese business and political economy at the Center for Strategic and International Studies. “In the short term, China is certainly able to put a lot of pain on its targets.”

If Trump goes through with his tariffs, here are some of the things China might do in response, beyond matching tariffs:

Harass US companies operating in China. American firms have invested $256 billion in China since 1990, with companies such as Apple, Nike, General Motors, Ford, Starbucks and many others earning profits there that benefit shareholders back home. China can shut down foreign business at will, on pretexts such as safety violations or licensing snafus. As part of an ongoing dispute with South Korea last year, China shut down dozens of outlets of a Korean retailer operating in China. A few years ago, China punished Daimler, BMW and Audi for “antitrust” violations in what was really a campaign to get them to lower prices. American firms could find themselves subject to similar tactics.

Cause geopolitical trouble. The United States butts heads with China on a number of issues that aren’t commercial in nature, including the independence of Taiwan (which China views as part of China), a military buildup in the South China Sea and, of course, sanctions against North Korea. China could flex its muscles on any of those issues and take a harder line against American interests.

Impose bigger tariffs. Trump’s tariffs would generally be in the range of 25%. China could put higher tariffs on US imports to compensate for the smaller amount of imports. Trump could raise US tariffs in return, but if he did that, he’d be intensifying the pain for American firms and consumers purchasing those products, who’d be paying increasingly more for them.

Drive a wedge between the United States and other trade partners. China could sweeten its trade arrangements with European nations or others, as its relationship with the United States deteriorates. Many trade experts point out that the United States increasingly acts on its own under Trump, by withdrawing from the Paris climate accord and the Trans Pacific Partnership, for instance, and pursuing trade protections without consulting allies. Going it alone leaves other nations freer to act without concern for American interests.

Pull out of US business deals. China has about $140 billion worth of investments in the United States, which include partnerships and investments with US firms, along with Chinese-owned businesses operating here. The Chinese government has more sway over home-grown business interests than the US government does and could compel some of those businesses to pull out of deals in the United States.

Sell off US debt. China holds about $1.2 trillion in US government debt, which sounds like a lot, but it’s only 5.5% of all outstanding US debt. Some people worry that China could dump all that debt into markets, which would push interest rates up and cause other problems. But that could harm China more than anybody, which is why economists doubt it would ever happen. China’s currency, the yuan, would probably rise in value, harming Chinese exports. China would also become an economic pariah, shut out of parts of the global financial system. Meanwhile, other buyers of US debt would almost certainly materialize, even if it took a while for the dust to settle.

Exploit Trump’s political challenges. A tariff war would hurt businesses and consumers in China, just as it would in the United States. But Chinese President Xi Jinping may be in a better position to withstand the political pressure likely to mount in a genuine trade war. “Xi has no internal opposition, and you won’t see Chinese automakers or food growers on television complaining about a trade war,” says Kennedy. “Trump’s political position is more precarious. There have been and will be plenty of stories of farmers, auto workers, steelworkers, consumers and others who will potentially suffer in a trade war.”

Trump’s argument, of course, is that China is already harming American interests, which is why dramatic remedies are needed. What Trump hasn’t done is explain why the gain is worth the pain. And the pain is likely to come first.